Oil Investment in Iran After the Resumption of Crude Oil Purchases?

The finalization of Shell's return to the Iranian crude oil market, following Total of France, raises the key question of whether the presence of major European oil companies in Iran will be limited to crude oil purchases or will expand to participation and investment in Iran's oil and gas exploration and production projects. Shell, in addition to large-scale crude oil purchases from Iran, has previously been responsible for implementing development projects in Iran's oil fields, including the restart of 'Soroush' and 'Norouz', and unlike small and large Russian companies, has a significant track record of work in Iran after the revolution. According to information released by shipping sources, Shell has signed a contract to use the tanker 'Delta-Hellas' to load 130,000 barrels of crude oil from the Khark oil terminal on July 8. Before the announcement of the 2012 sanctions, Shell was one of the largest buyers of Iranian crude oil, purchasing up to 200,000 barrels daily, and after the sanctions were lifted, it paid off its $2.3 billion debt to Iran for oil purchases. Despite a relative welcome for the possibility of resuming oil purchases from Iran, major European oil companies continue to shy away from long-term commitments or direct investments in Iran's oil and gas development projects. As a result, even after the reform of Iran's oil contracts known as 'buy-back' by the Rouhani government and the announcement of readiness to welcome major oil companies, even American companies have limited their activities to purchasing Iranian oil since the sanctions were lifted in January of this year. To reach crude oil production capacity before the imposition of sanctions and increase exports, Iran requires investments between $50 billion to $100 billion and needs to utilize advanced technologies in exploration and extraction. Without the active participation of reliable and large foreign companies, achieving the announced goals and reclaiming lost oil markets in the coming years will not be possible. Having a larger share in oil markets, in addition to securing more foreign currency income and increasing purchasing power, is politically and security significant due to the increased influence of the exporting country in the global community. The latest example is Saudi Arabia, which is the largest crude oil exporter in the world and has over $900 billion in foreign reserves. Recently, the Riyadh government managed to persuade the United Nations to remove its name from the list of those accused of violence against children (Yemen) by using its influence in global forums. Iran faces competition in the region and in oil export markets with Iraq and Saudi Arabia, and in gas production with Qatar. The oil and gas contracts of the mentioned countries (Iraq and Qatar) have more advantages for oil companies compared to Iran's buy-back contracts, which still resemble contractor agreements. During low oil prices, the reluctance of foreign contractors (oil companies) increases due to the prolonged repayment period of development project costs. Since the beginning of Zangeneh's tenure in Rouhani's government, reforms have been made in favor of oil companies in the 'fourth generation of buy-back contracts' to increase competitiveness with Iraq in attracting foreign investments, but the new contract model, which was recently unveiled in Tehran and faced sharp criticism from hardliners, has not yet generated sufficient interest among major oil companies for participation in development projects. Due to the relative stabilization of crude oil prices in the market in recent months and the forecast of continued increases aligned with rising demand, it is expected that oil companies' enthusiasm for investing in oil-rich countries will increase - but this has not yet happened for Iran due to multiple reasons. The uncertain future of nuclear sanctions and ongoing banking and insurance issues for oil shipments, as well as the internal political situation in the coming months in the U.S., have added to the uncertainties for investment in Iran. Although it is not expected that Donald Trump, the Republican candidate, would suddenly cancel the JCPOA and turn his back on Obama's commitments to the Islamic Republic if he were to enter the White House, he will not stand against potential congressional efforts to impose new sanctions against Iran using his veto power. The predictable reactions of the Islamic Republic to future congressional actions and the possibility of Rouhani not being re-elected next year will place the JCPOA and Iran's economic and political situation in a completely different position than today, which is a factor that major oil, mining, industrial, or service companies will consider before making a final decision on long-term presence or investment in Iran. The earliest possible time for significant foreign investments in Iran's upstream industries will likely be postponed until after the determination of the next occupant of the White House and the presidential elections in Iran. The outlook for oil and gas cooperation: The Islamic Republic, which believed it could overcome the crisis using the capacities of Chinese and Russian companies during the sanctions, and even reported agreements for the daily delivery of 500,000 barrels of crude oil to Russia and the implementation of joint exploration and production contracts, has now, after experiencing unfulfilled promises and inaction from the Russians, only relied on attracting the attention of major Western companies. Iran aims to reach a production capacity of 4 to 4.5 million barrels per day and export 2 to 2.5 million barrels of oil daily. Only cooperation with major European companies (in the foreseeable absence of American companies in the coming years) will make achieving this goal possible. Iraq, which is considered a competitor to Iran in crude oil production and export, has announced its oil production target of 12 million barrels per day and, in terms of production volume, exports, and especially attracting direct foreign investments and contracts with oil companies, is in a much better position than Iran despite its specific security situation and ongoing civil war. In the gas production sector, Iran is also interested in exporting natural gas (under pressure) via pipeline to European markets and is keen to enter the liquefied natural gas (LNG) production industry with an annual volume of 10 million tons. Currently, Iran has neither a liquefied gas production plant nor a gas transport terminal or special gas transport ships. Establishing infrastructure and entering the ranks of liquefied gas producers cannot be achieved merely through wishful thinking. In the past, Shell, in addition to deciding to complete Phase 11 of the South Pars gas field, intended to produce this product in Iran by obtaining technical production permits, which are generally owned by American companies. With the partial lifting of sanctions and the implementation of the JCPOA, the Rouhani government is determined to convince major oil companies like Shell, Norway's Statoil, France's Total, and Italy's Eni to resume past collaborations with Iran. The Rouhani government is also interested in having Total take on a role in developing Phase 2 of the South Azadegan oil field after accepting an investment commitment of up to $5 billion and participating in LNG production in Iran, but Total (in a policy similar to Shell) has so far refrained from signing contracts in these areas and has limited its cooperation to oil purchases. The cautious return of major oil companies to the Iranian market is a positive step towards reclaiming Iran's lost oil markets. The strategic policy of the government and state at this juncture should aim to renew the status of oil and gas in Iran's development outlook.